Customs
Act, 1962: Sections 22, 27--Import of goods as per contract--Clearance of goods
paying customs duty--Detec- tion of supply of inferior goods--Payment of
compensation by sellers to importer--Whether amounts to reduction in
price--Whether refund of customs duty can be claimed.

HEAD NOTE:

The
appellant-Federation entered into a contract with a Soda Company of Kenya, for supply of 5000 metric tonnes
of soda ash dense and the consignment arrived at Bombay on 23.12.1981. The goods were cleared on payment of customs
duty of Rs.32,15,904.21.

The
appellant on distribution of the goods to various members of the Federation,
received complaints that the soda ash which had been supplied was of
sub-standard quality.

When
the sellers as well as their agents were approached, they sent a team of
experts to examine the goods and on inspection the goods were found defective.
As per agreement dated 9.2.1982, the sellers sent a credit note of US $
2,40,000 as compensation on account of the defective goods.

The
amount remitted on account of the import made was only US $ 5,35,000 as against
the earlier contracted amount of US $ 7,75,000.

In
view of such reduction, the appellant filed a refund application before the
Customs Department to the tune of Rs.9.95,892-65. The Assistant Collector
rejected the refund application as he was not satisfied to the extent of
deterioration of the goods before clearance as provided by Section 22 of the
Customs Act.

The
appeal preferred was rejected by the Collector of Customs on the reasoning that
the damage wad discovered after the goods were out of customs control.

The
further appeal to the Tribunal was rejected hold- ing that the alleged inferior
nature of goods was discovered after clearance.

514
Under Section 130E of the Customs Act, 1962, present appeal was made to this
Court, contending that the goods supplied were not in accordance with the
contractual speci- fication, the defects being inherent in nature resulted in
diminution in the real value of the goods and what had been agreed upon by the
foreign seller was reduction in price on account of the defects, and claimed
that it would be enti- tled to refund of customs duty under Section 22 of the
Act.

On the
question, whether the appellant was entitled to the refund of customs duty on
account of the compensation given by the seller to the appellant on supply of
goods, dismissing the appeal, this Court,

HELD:

1.01.
When the value is assessed on the basis of the invoice and the goods are cleared,
the implication is that no remission is allowed and no abatement has been
occasioned. There is no express provision which enables the proper officer to
make a re-assessment for the purpose of remission on the ground that the goods
at the time of their importation or at the time of the clearance was
sub-standard or damaged and the invoice price does not represent the real
value. [520E-F]

1.02.
Any error in the assessment of the value by itself does not enable the importer
to claim re-assessment or refund. It has necessarily to be shown that on
account of the damaged or deteriorated condition of the imported goods before
or during the unloading of the goods in India, the duty to be charged on the goods was proportionate to the value of
the damaged or deteriorated goods. [520G-521A]

1.03.
The question of redetermining the value of the imported goods can arise only in
a case where such damage or deterioration before the clearance is proved to the
satis- faction of the proper officer. When there had been no indi- cation of
any such condition and the duty has been assessed on the basis of the invoice
value and duty is paid, the assessment would be binding. The importer on
finding the goods cleared and distributed not to his entire satisfaction may
have a claim in contract against the seller for provid- ing sub-standard,
damaged or deteriorated goods for the value in the invoice, and it may be open
to the buyer to realize from the seller such damages as he would in law be
entitled to. That claim for damages cannot have any bearing to the assessment
at the time of the clearance. The price at which the goods has been sold is
represented by the invoice price and whatever amount is realized on subsequent
agree- ment is only by way of compensation as damages. It cannot be said that
the damages thus received represents the differ- ence in price that had been
paid and that ought to have been 515 paid. When the seller had agreed to
compensate the buyer for the quality of the goods imported, the buyer does not
get the right to claim abatement of duty on the assumption that the real price
was something less than what has been indi- cated in the invoice. [521A-D]

1.04.
There is no material on record to show that there had been a re-assessment of
the value of the goods. What had been estimated is only quantum of damages
sustained by the buyers and to that extent they had been compensated. That
arrangement between the buyer and the seller cannot be linked with the
assessment of duty and no claim for abate- ment of duty under the provisions of
Section 22 or a claim for refund under Section 27 could be legitimately enter- tained.
[523A-B] Biggin & Co. Ltd. v. Premanite, LD., Berry Wiggins & L.D., [1951] 1 K.B.
422; CehaveNV v. Bremer, [1975] 3 A.E.R. 739; Ford Motor Company of India v. Secretary' of State for India, [1937-8] L.R. 659. A. 32 and Vaccum
Oil Co. v. Secretary of State for India, [1932] L.R. 59, IA 258, referred to.

The
Judgment of the Court was delivered by FATHIMA BEEVI, J. The appellant is a
federation of glass manufacturers in India. The Federation entered into a contract with M/s. Magadi Soda Company
Ltd., Kenya, for supply of 5000 metric ' tomes
of soda ash dense at the rate of US $ 155 per metric tome c.i.f. Bombay. The consignment arrived from Mombasa, Kenya on 23.12. 198 1. The goods were cleared on payment of
customs duty of 516 Rs.32, 15,904.21 from Bombay. The appellant on distribution of the goods to various members of the
federation, received complaints that the soda ash which had been supplied was
of sub-standard quality.'The sellers M/s. Crescent Dyes & Chemicals as well
as their agents were approached. They sent a team of experts to examine the
goods. The inspection confirmed that the goods were defective. As per agreement
dated 9.2. 1982, M/s. Crescent Dyes & Chemical sent a Credit note of US $
2,40,000 as compensation on account of the defective goods sent by M/s. Magadi
Soda Company Ltd. The amount remitted on account of the import made was only US
$ 5,35,000 as against the earlier contracted amount of US $ 7,75,000.

In
view of such reduction, the appellant filed a refund application before the
Customs Department to the tune of Rs.9.95,892.65. The Assistant Collector was
not satisfied as to the extent of deterioration of the goods before clearance as
provided by Section 22 of the Customs Act and rejected the refund application
vide order dated 19.7.1982.

The
appeal preferred against the order dated 19.7.1982 was rejected by the
Collector of Customs on 23.12. 1982 on the reasoning that the damage was
discovered after the goods were out of customs control. The further appeal to
the Tribunal was also unsuccessful. The Tribunal by the order dated 26.10. 1989
held that the alleged inferior nature of goods was discovered after clearance.

This
appeal is filed under Section 130E of the Customs Act, 1962 against the order
of the Tribunal dated 26.10. 1989.

The
question involved in the present appeal is whether the appellant is entitled to
the refund of customs duty on account of the compensation given by the seller
to the appellant on supply of goods? The appellant who imported the goods
detected defects and the foreign supplier accepted the defects and damages and
agreed for payment of compensation.

According
to the appellant, goods supplied were not in accordance with the contractual
specification. The defects 'being inherent in nature resulted in diminution in
the real value of the goods and what had been agreed upon by the foreign seller
is reduction in price on account of these defects. The appellant claimed that
it would be entitled to refund of customs duty under Section 22 of the Act for
reasons set out thus. The value to be assessed under Section 14 of the Act is
the real price at which goods imported are ordinarily sold at the time and
place of importation and not the price erroneously indicated 517 by the seller
at the time of filling the bill of entry. The buyer who successfully sets up
diminution of price on ac- count of breach of warranty, which claim is accepted
by the seller, can seek refund or adjustment in the customs duty payable where
the duty has been paid erroneously on the full price prior to such diminution.
The claim under Section 22 of the Act would be maintainable where imported
goods were defective and had deteriorated in quality even prior to the import
when the assessment has to be on the basis of the real value of goods.

The
contract dated 30.9.1981 is for the supply of 5000 metric tonnes of soda ash
dense. The complaint was that the sodium carbonate content was less than the
specified 97%, that there was moisture in the soda ash dense supplied and hence
it had turned lumpy. M/s. Crescent Dyes & Chemicals Ltd. was the agent of
the seller M/s. Magadi Soda Company Ltd. The consignment. arrived in Bombay sometime in Decem- ber, 1981. The
appellants filed their bill of entry with the customs and the goods were
cleared on payment of customs duty of Rs.32,15,904.21, on 28.12. 1981. the
complaint about damage and deterioration was made long after clearance. The
team of experts examined the goods and confirmed the de- fects. The customs
authorities were not associated with such inspection.

It is
maintained by the appellant that the credit received was recorded in the letter
dated 15.3. 1982 and the letter indicated that the amount remitted on account
of the import made was only US $ 5,35,000. The reduction in the amount remitted
was to the extent of US $ 2,40,000. The appellant claimed that on account of
the reduction in the value of the consignment, the appellant is entitled to
refund of customs duty proportionately.

The
Collector of Customs pointed out that:

"The
duty is leviable on the basis of the value of the such or like goods at the
time of clearance. It has not been proved that the alleged defect on account of
which the price has been reduced was present in the goods at the time 01
clearance. At least some of the defects of the type pointed out, viz., the
lumpy character, are such as could develop due to exposure to moisture etc.
during the period the goods were out of customs. In any case, the customs were
not associated even with the post-clearance examination. Any alleged reduc- tion
in value on the basis of a postclearance agreement between the buyer and the
supplier or 518 some alleged grounds which the customs had no chance to verify'
prior to clearance is fraught with great risks to Revenue.

(emphasis
supplied) According to the appellant, this reasoning is wrong. The appellant
stated that most of the defects were due to non- adherence to specification
provided under the contract. The defects being inherent in character, the
appellant could not have known about the same at the time of clearance of the
consignment from customs. The ground of deterioration of goods was not relevant
as the claim for refund was based on the ground of diminution in value of the
goods as the same were not as per the standard contracted for. The assessable
value of the goods under Section 14 of the Act is the price at which such goods
were actually sold in the course of international trade. It is the real price
of the goods actually imported which is ordinarily the basis for assessa- ble
value. Where goods do not conform to the description or stipulation as to
quality or fitness, it is open to the buyer to treat the defect as a breach of
warranty. It is also open to the buyer to set up against the seller the breach
of warranty in diminution of the price. It is the diminished price which will
be the real price of the goods and not the price claimed by the buyer initially
which is reflected as c.i.f. value on the invoice. Customs duty paid on the
c.i.f. value is a duty paid under mistake of fact. At the time of clearance of
goods, the buyer did not have any knowledge of the defects in the goods. Where
defect which constitutes a breach of warranty and which the buyer elects to
treat as a breach of warranty became apparent and ulti- mately culminated in
diminution of price, it would be open to the buyer to claim refund of the
customs duty paid under mistake of fact. It is not relevant as to when the
defect became apparent to the buyer. The fact that the documents proving the
true and real value of the goods were not in existence at the time when the
goods were cleared from the customes is wholly irrelevant- This in short, is
the argu- ment advanced on behalf of the appellant.

Duties
of customs shall be levied under Section 12 at such rate as may be specified
under the Customs Tariff Act or any other law for the time being in force on
goods im- ported into or exported from India. Section 14 of the Cus- toms Act provides that value of such goods
shall be deemed to be the price at which such or like goods are ordinarily sold
or offered for sale for delivery at the time and place of importation in the
course of international trade. Such price shall be calculated with reference to
the rate of exchange as in force on the date on which 519 a bill of entry is
presented under Section 46. The duty is ordinarily chargeable with reference to
the tariff value in the case of goods entered for home consumption on the date
on which the bill of entry in respect of such goods is presented.

Section
22 provides for payment of duty on damaged or deteriorated goods. It reads
thus:

"22.
Abatement of duty on damaged or deterio- rated goods.

(1)
Where it is shown to the satisfaction of the Assistant Collector of Customsó

(a) that
any imported goods had been damaged or had deteriorated at any time before or
during the unloading of the goods in India; or

(b)
that any imported goods, other than ware- housed goods, had been damaged at any
time after the unloading thereof in India but before their examination under
Section 17, on account of any accident not due to any wilful act, negligence or
default of the importer, his employee or agent; or

(c)
that any warehoused goods had been damaged at any time before clearance for
home consump- tion on account of any accident not due to any wilful act,
negligence or default of the owner, his employee or agent;

such
goods shall be chargeable to duty in accordance with the provisions of
sub-section (2).

(2)
The duty to be charged on the goods re- ferred to in sub-section (1) shall bear
the same proportion to the duty chargeable on the goods before the damage or
deterioration which the value of the damaged or deteriorated goods bears to the
value of the goods before the damage or deterioration." Where it is shown
to the satisfaction of the Assistant Collector that any imported goods have
been lost or de- stroyed at any time before clearance for home consumption.

the
Assistant Collector of 520 Customs shall remit the duty on such goods. The
period of six months has been prescribed under Section 27 to claim refund of
duty paid with protest. Refund is allowed when the Assistant Collector of
Customs is satisfied that the whole or any part of the duty paid should be
refunded. No claim for refund of any duty shall be entertained except in ac- cordance
with the provisions of Section 27.

Chapter
VII of the Customs Act deals with the clearance of imported goods. The imported
goods unloaded in a customs area remain in the custody of the approved person
until they are cleared for home consumption. Without permission in writing of
the appropriate officer, such goods are not removed or otherwise dealt with.
The importer shall give a declaration as to the truth of the contents of the
bill of entry supported by the invoice. The order permitting clear- ance of the
goods for home consumption is made on payment of the import duty, if any,
assessed.

Thus,
under the scheme of the Act, the importer is entitled to clear the goods on
payment of duty assessed and such assessment is to be made with reference to
the tariff value of the goods where tariff values are fixed. In other cases,
the price at which the goods are ordinarily sold for delivery at the time and
place of importation represents the tariff value for the purpose of the
assessment. When the value is assessed on the basis of the invoice and the
goods are cleared, the implication is that no remission is allowed and no
abatement has been occasioned. There is no express provision which enables the
proper officer to make a re- assessment for the purpose of remission on the
ground that the goods at the time of their importation or at the time of the
clearance was sub-standard or damaged and the invoice price does not represent
the real value. Even if it is assumed that in view of the provisions contained
in Section 28(a) enabling the proper office to determine the amount of duty due
in cases where duty has not been levied or has been short levied or erroneously
refunded after issuing show cause notice, there is a corresponding right on the
importer to claim refund of the excess duty levied, it is necessary for the
importer to prove to the satisfaction of the proper officer that the goods at
the time of the clearance was chargeable to a lesser or lower duty for anyone
of the reasons contained in Section 22 which alone provides for abatement of
duty. Any error in the assessment of the value by itself does not enable the
importer to claim re-assess- ment or refund. It has necessarily to be shown
that on account of the damaged or deteriorated condition of the imported goods
before or during the unloading the goods in India, the duty to be charged on
the goods was propor- 521 tionate to the value of the damaged or deteriorated
goods.

The
question of redetermining the value of the imported goods can arise only in a
case where such damage or deterio- ration before the clearance is proved to the
Satisfaction of the proper officer. When there had been no indication of any
such condition and the duty has been assessed on the basis of the invoice value
and duty is paid, the assessment would be binding. The importer on finding the
goods cleared and distributed not to his entire satisfaction may have a claim
in contract against the seller for providing sub-standard, damaged or
deteriorated goods for the value in the invoice, and it may be open to the
buyer to realize from the seller such damages as he would in law be entitled
to. That claim for damages cannot have any bearing to the assessment at the
time of the clearance. The price at which the goods had been sold is
represented by the invoice price and whatever amount is realized on subsequent
agreement is only by way of com- pensation as damages. It cannot be said that
the damages thus received represents the difference in price that had been paid
and that ought to have been paid. When the seller had agreed to compensate the
buyer for the quality of the goods imported, the buyer does not get the right
to claim abatement of duty on the assumption that the real price was some thing
less than what has been indicated in the invoice.

Where
it is shown to the satisfaction of the Commissioners of Customs and Excise that
goods were imported in pursuance of a contract of sale and that their
description, quality, state or condition was not in accordance with the
contract, or that they were damaged in transit, and also that the importer,
with the consent of the seller, either returned the goods to him or destroyed
them unused, the importer is entitled to obtain from the Com- missioners
repayment of any customs duty paid on their importation. The foregoing, however,
does not apply to the goods imported on ap- proval, or on sale or return, or on
other similar terms." It deals with the returning of goods or destroying
the goods unused without acceptance and not where the goods have been accepted
and used and the importer had been compensated for the reduction in 522 standard.
The learned counsel also referred to the decision in Biggin & Co. Ltd. v. Premanite,
LD., Berry Wiggins & Co. LD. [1951] KB 422; CehaveNV v. Bremer, [1975] 3 A.E.R. 739;
Ford Motor Company of India v. Secretary of State for India, [1937]-381 L.R. 65
I.A. 32 and vacuum Oil Co. v. Secretary of State for India, [1932] L.R. 59
I.A.258.

On the
basis of these decisions, the learned counsel for the appellant contended that
when the seller has allowed the reduction, the real price of the goods is that
which has been accepted by the seller and that the assessment made on a higher
value on the basis of the invoice price is in excess and such excess is
refundable to the appellant.

It is
not necessary to elaborate on the principle stated in the decisions on the
facts of the present case.

It is
admitted case of the appellants that the alleged inferior nature of goods was
discovered by the appellant after clearance. Until the refund application was
made, no requisition appears to have been made to the customs author- ities to
have the value of the goods determined for the purpose of Section 22. The
correspondence between the appel- lants and the sellers ,red their agents could
only reveal that the appellant put forward a claim for compensation on the
ground that the goods imported had become lumpy and was also of inferior
standard. Ultimately the sellers agreed to reimburse the appellants and pay
compensation to the tune of US $ 2,40,000. What appellants have received from
the sell- ers is compensation for the damage for breach of warranty.

It
does not appear that the value was reduced or amount remitted by the appellant
was the reduced value of tire goods. The amount was the total compensation
extended by the sellers to the appellants. From that fact of payment of
compensation or reimbursement by the sellers it cannot be taken that at the
time and place of importation the goods imported was worth only the amount
stated in the invoice less the compensation paid. In other words, there is no
proof that the real value of the goods at the time and place of importation was
less than that what had been entered in the invoice and stated in the Bill of
Entry. So long as examination of the goods had not been made or its value re-
assessed to the satisfaction of the assessing authorities, it cannot be said
that duty was charged not on the real value of the goods but on a higher
amount. The contention that the inherent defect in the supply of goods resulted
in the diminution of the value of the goods cannot be counte- nanced when it is
conceded that what had been paid by the seller is only compensation for the
breach of war- 523 ranty. Furthermore, there is no material on record to show
that even by the team of experts there had been a re-assess- ment of the value
of the goods. What had been estimated is only quantum of damages sustained by
the buyers and to that extent they had been compensated. That arrangement
between the buyer and the seller cannot be linked with the assess- ment of duty
and no claim for abatement of duty under the provisions of Section 22 or a
claim for refund under Section 27 could be legitimately entertained.

For
the reasons given above, the appeal must fail. The appeal is dismissed with no
order as to costs.